CGT advice needed

wassup

I need to raise £20,000 by end of April. I can do this by selling some of my holding in a Standard Life Capital Bond which I invested in in 1999.

This has done quite well and increased in value. Initial investment £60k, currently worth around £100k. I want to try and avoid CGT on the part sale of my investment.

How should I do this. The Bond is in joint names with my wife.

If I take £20k out in one go will I be liable for any cgt?

Could I split the sale, say £10k now and then £10k after April 5th, into next financial year, would that help ?

I've tried reading the IR SA180 form but its double dutch to me, and I don't see any reference to this type of investment.

tia

Cleasby_2

What you have is an investment bond. Investment bonds are dealt with under the income tax, not the capital gains tax provisions.

Your bond will consist of multiple policies.

You can raise your £20,000 in two different ways - partial surrender or partial withdrawal.


1. Partial surrender

Let's suppose your initial investment of £60,000 is made up of a cluster of 100 policies. Each policy had an original cost of £600.

The investment is now worth £100,000. So each individual policy is worth £1,000.

That means that each individual policy stands at a gain of £400.

You need to raise £20,000. In order to do this you will have to surrender 20 policies. That gives you a gain of £8,000.

You say the bond is owned jointly with your wife. Be sure about your facts here. Check your policy documents carefully. Who are the policy holders? Who are the lives assured? Don't mistake policy holders for lives assured. What we are concerned to establish is the identity of the policy holders.

If the policyholders are you and your wife, you are each allocated half of the gain - £4,000 each. If you are the sole policyholder then the entire gain is yours.

The gain is deemed to have suffered basic rate tax already. If the policyholder is a non taxpayer or a basic rate taxpayer this means there is no tax to pay. If the policyholder is a higher rate taxpayer further tax will be payable.

The gain falls into the tax year in which the partial surrender takes place.

If you have a liability to tax and you are not in the self assessment system you must give notice of chargeability to your tax office by 5 October following the end of the tax year in which you make your gain.


2. Partial withdrawal

Here you don't encash any of your policies but you make a withdrawal against the whole investment.

The legislation allows you to draw up to 5% of your original investment
without any immediate tax consequence.

You made your investment in 1999. So you have clocked up at least seven whole years of ownership. If we assume you have never before drawn anything out of the bond then your cumulative 5%'s now come to 35%. 35% of £60,000 is £21,000.

The cumulative allowances exceed the amount to be withdrawn therefore there will be no charge to income tax if the withdrawal is arranged in this way.


At first sight it might seem like partial withdrawal is better than partial surrender. But it ain't necessarily so. The 5% allowance is just a quirk of the taxation of life policies. Over the lifetime of the bond you are chargeable to tax on the difference between the amount you get out and the amount you put in. The 5% allowance disappears into thin air. In other words it is just a deferal mechanism.

If you are satisfied the gain doesn't take you up into the higher rate tax bracket you will be better off raising the funds by means of a partial surrender.

So for each policy in the bond work out its current value, its cost and its gain. Form there work out how many policies you need to surerender to raise your £20,000.

I hope that helps.

wassup

Fantastic... thanks very much for such a clear explanation. I phoned the Standard Life about it and they have said the same as you, that I can take out 5% without any tax liability, ie up to £21k. The reason I didnt phone them at firts is I did ask them about this before but the person on the phone said they couldnt tell me. But seems they now can.

Since there is no tax liability does that mean that it makes no difference if I take the money out before or after this coming 5th April, end of tax year.

I'd rather leave the investment running for as long as possible before I take it out. But if I would save something by taking it out before the 5th April then maybe I should do that instead.

Murdina

If you are definitely not a higher rate tax payer this year including the bond income but might be next year that would be a reason to cash in now. Of course higher rate band kicks in at a slightly higher level of overall income next year.